Morgan Stanley’s Wilson Says US Stocks Can Rally in Short Term

(Bloomberg) — Morgan Stanley’s long-time equities bear says US stocks are ripe for a short-term rally in the absence of an earnings capitulation or an official recession.

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A 25% slump in the S&P 500 this year has left it testing a “serious floor of support” at its 200-week moving average, which could lead to a technical recovery, strategist Michael J. Wilson wrote in a note on Monday.

Wilson — one of Wall Street’s most prominent bearish voices, who correctly predicted this year’s slump — said he “would not rule out” the S&P 500 rising to about 4,150 points — suggesting 16% upside from its latest close. “While that seems like an awfully big move, it would be in line with bear market rallies this year and prior ones,” he said, while retaining his overall negative long-term stance on equities.

US equities have been hammered in 2022, with the S&P 500 set for its biggest annual decline since the global financial crisis, as investors fear that historic inflation combined with a hawkish Federal Reserve and slowing growth would tip the economy into a recession.

A rise in core consumer prices to a 40-year high last month has cemented bets of another aggressive Fed rate hike in November, but Wilson said he believes inflation has now peaked and “could fall rapidly next year.” Still, the strategist said he expects “an acute and material earnings deceleration” over the next 12 months.

Wilson also warned that although it usually takes a “full-blown recession” for the S&P 500 to fall below the key 200-week moving average, if the index fails to hold that level this time around, the rally may not materialize at all. Instead, the benchmark could slump to 3,400 points or lower — at least 5% below its Friday close, he said. Ultimately, he sees the bear market bottoming around 3,000-3,200 points.

Goldman Sachs Group Inc. strategists, meanwhile, said the S&P 500 remains expensive versus history and accounting for interest rates. Yet they see attractive opportunities in stocks linked to quicker cash flow generation, value, profitable growth, cyclicals and small caps, the strategists including David J. Kostin wrote in a note dated Oct. 14.